July 29, 2020 · Budget, Credit, Savings
During the current COVID-19 pandemic, many types of companies—including apartment complexes, banks, credit unions and credit card issuers—are offering deferred payments on rent, mortgages, car loans, credit card charges, and a variety of other types of debt or bills. According to a June 2020 story in The Wall Street Journal, “Americans have skipped payments on more than 100 million student loans, auto loans and other forms of debt since the coronavirus hit the U.S., the latest sign of the toll the pandemic is taking on people's finances.” This is to be expected with millions of people unemployed and totally or partially furloughed. Without an ongoing income or other means to pay bills, there may be few options for consumers other than to not make their regular debt payments.
A potential effect of these skipped payments is a downgrade to consumers' credit scores, since these scores directly reflect how timely and complete scheduled payments are against credit card charges and other types of debt. This year's Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress provided a number of protections to help Americans manage their finances and consequently lessen damage to their credit score during the pandemic, and some are explained below. While we've already discussed a list of options for managing your finances during the pandemic, you also need to think about how to actively manage your credit score during this unprecedented health situation.
Here are some ideas for managing your credit score during the pandemic:
As part of the CARES Act, your credit card company or loan provider now has special requirements for reporting your payment record during the pandemic crisis. For consumers, if you establish an agreement for assistance with a creditor for reduced or deferred payments and are current on your account, then you will be reported as current even if you are not making regular payments, and this will be in force as long as you maintain your mutual agreement. The federal government's Consumer Financial Protection Bureau offers more advice on protecting yourself financially.
Contact your utilities, cellphone and internet service companies, credit card provider(s), bank, credit union, mortgage (or other loan) providers and explain to them your situation and ask if an accommodation, forbearance or hardship assistance program is available. Negotiate with them to get to payment terms that are realistic and mutually agreeable. Ask how that program will be reported to the credit reporting agencies. Keep lenders and creditors informed if anything significant about your situation changes, such getting a new job, or getting more or full work hours if you're employed.
Try to make at least the minimum required payment on some (or all) of your accounts, or pay the full amount that you have negotiated with your lenders or creditors so as not to breach your agreement. Also, if possible, make your payments on time, as paying after the deadline may still be reported to credit reporting agencies and could negatively affect your credit score.
Your credit card(s) may be an essential lifeline if you're unemployed or furloughed, but, if you can, don't use them too much. Your credit utilization ratio is big factor affecting your credit score. So what's a credit utilization ratio? It’s the credit you use compared to your credit card usage limits. So if you have a total credit limit on a card (or spread across several cards) of $12,000, and your current credit usage (spending) is $6,000, then your ratio is 50%; you're using half your limit of $12,000. Recommendations from credit reporting agencies are that you should try to keep your usage below 30% of your credit limit, whether for an individual card or for all your cards, to earn a higher credit score.
Because of the current health crisis, you can now check your credit score report weekly at no cost. In response to the crisis, the three major credit reporting agencies—Atlanta-based Equifax, along with Experian and TransUnion—are offering free weekly online credit reports through April 2021 to help consumers track and manage their credit score while they are experiencing financial hardship caused by the pandemic.
While this would not directly affect your actual credit score, you may be able to go online and add a brief 100- to 200-word statement to your credit reports explaining your financial situation for any organization that may be checking your credit score. Check with the primary credit reporting agencies (Equifax Home Page, Experian Home Page, and TransUnion Home Page) to find out if (and how) to add a statement to your credit reports.
If you'd like to get more information that may help you manage your finances, then look into the free Delta Community Financial Education Center webinars on a wide range of timely, practical financial topics. Please visit the Financial Education Center's Events & Seminars page to register for our on-demand webinars.